Question

2. Firm value and capital structure in the absence of tax. Assume a zero corporate tax rate. Because both the risk of a firm’s equity and debt increase with debt financing, then the value of the firm should decrease when it uses more and more debt. True or false?

Answer 1

According to economists Modigliani and Miller, in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, in an efficient market, the value of a firm is unaffected by its capital structure.

There fore according to modigilani and miller approch the statment ie Firm value and capital structure in the absence of tax. Assume a zero corporate tax rate. Because both the risk of a firm’s equity and debt increase with debt financing, then the value of the firm should decrease when it uses more and more debt.

is FALSE

is